Should We Maintain High Expectations for FAANG?

At a Glance

  • The FAANG stocks are all up more than 20% this year as stay-at-home life embraces technology
  • Growth could taper in the months ahead with FAANG companies trading at historically expensive P/E ratios

As Covid-19 continues to hinder the economy and business throughout the country, stock market sentiment has told a very different story and showed that there is a huge disconnect right now between the economy and the markets.

Throughout the pandemic, economists and analysts have tried to predict what shape of a recovery the economy will have. Everywhere from “V”-shaped to “I”-shaped to “Nike Swoosh” have been used to describe how the U.S. economy will bounce back from this unprecedented time. However, even with unemployment numbers climbing higher than estimated figures, and positive Covid-19 cases across the country still spiking in hotspots, the markets are in the midst of a recovery that is way ahead of the economy.

The Stay-At-Home Surge

The coronavirus pandemic has acted as a catalyst for technology and other stay-at-home product companies to prove just how important their products are in a world where all facets of life are moving online. With most of the workforce working from home for the past few months and many companies planning for a work-from-home future, technology companies have become more integral than ever before.

At the forefront of those companies are the FAANG stocks, (Facebook, Apple, Amazon, Netflix, Alphabet  and Microsoft. Despite the Covid-19 outbreak, all these technology giants have recently hit all-time highs, as well as other technology and stay-at-home stocks such as Nvidia and Shopify.

Amazon stock is up almost 70% year-to-date. Netflix is up over 50% year-to-date, with Apple and Facebook both up over 30% as well. Not only are these mega-cap companies some of the biggest and most-well known in the world, their products were perfect for a global shutdown. With grocery stores shut down, people used Amazon and Shopify for e-shopping and e-retail. Working from home meant more time on the internet for Google and Facebook users, and streaming entertainment through streaming services like Netflix.

Apple and Microsoft products became essential not only for personal use but also for work and communication with coworkers. The increased need for their products caused their stock prices to soar and create hope that the economy was coming back, and we were experiencing an “I”-shaped economy recovery because the stock market giants were doing so.

Where The Economy Really Is

As of July 13, Facebook, Apple, Amazon, Microsoft, and Google made up over 21% of the S&P 500 market cap. All these stocks are up over 20% year-to-date, apart from Google which is up about 14%. Compare that to the S&P 500 Index which as of close July 20th, 2020, is still down .18% year-to-date. The S&P 500 minus these five stocks is a more accurate indicator of where the broader economy really is, and mega-cap stocks have provided a distraction from how an “I”-shaped, or even “V”-shaped economic recovery just isn’t there, (yet).

Despite the market recovery over the last four months since the bottom in late March, it would be realistic to expect these companies’ growth to taper and their stock prices to potentially experience a healthy pullback as all of the above companies are trading at a historically expensive P/E ratio relative to their averages.

The FAANG + Microsoft stocks have created the illusion of a speedy and complete recovery for the U.S. equity markets but unfortunately that is not the case for the broader market. Expectations of those stocks could be lowered moving forward as other sectors catch up to the outperformance of technology.

Scott Bauer graduated with honors from the University of Illinois Business School, Urbana Champaign, in 1988 with a B.S. in Finance. Bauer began floor trading in 1991 and formed BOTTA Capital Management in 1995. Scott traded equity options, S&P options at CME and was employed by Goldman, Sachs & Co. as Vice-President, Equities Division. He is currently CEO of Prosper Trading Academy and appears regularly on CNBC, Bloomberg Financial and Fox Business as a guest commentator.

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